1. “If an individual is to maximize the utility received from consumption, he or she should spend all available income. . .
.” This statement assumes:
a.
that saving is impossible.
b.
that the individual is not satiated in any one good.
c.
that no goods are “inferior.”
d.
that every good has a positive marginal utility.
a
1
2. Suppose an individual’s MRS (of steak for beer) is 2:1. That is, at the current consumption choices he or she is willing
to give up 2 beers to get an extra steak. Suppose also that the price of a steak is $1 and a beer is $4. Then in order to
increase utility the individual should:
a.
b.
c.
b
1
3. Suppose that at current consumption levels an individual’s marginal utility of consuming an extra hot dog is 10 whereas
the marginal utility of consuming an extra soft drink is 2. Then the MRS (of soft drinks for hot dogs)—that is, the number
of hot dogs the individual is willing to give up to get one more soft drink—is:
a.
5.
b.
2.
c.
1/2.
d.
1/5.
d
1
4. If an individual’s indifference curve map does not obey the assumption of a diminishing MRS, then:
a.
the individual will not maximize utility.
b.
the individual will buy none of good x.
c.
tangencies of indifference curves to the budget constraint may not be points of utility maximization.
d.
the budget constraint cannot be tangent to an appropriate indifference curve.
c
1
5. An increase in an individual’s income without changing relative prices will:
a.
rotate the budget constraint about the X-axis.
b.
shift the indifference curves outward.
c.
shift the budget constraint outward in a parallel way.
d.
rotate the budget constraint about the Y-axis.
c
1
6. The slope of the budget constraint line is:
a.
the ratio of the prices (px/py).
b.
the negative of the ratio of the prices (px/py).
c.
the ratio of income divided by price of y (I/py).
d.
none of the above.
b
1
7. If the price of x falls, the budget constraint:
a.
shifts outward in a parallel fashion.
b.
shifts inward in a parallel fashion.
c.
rotates outward about the x-intercept.
d.
rotates outward about the y-intercept.
d
1
8. Suppose that an individual has a constant MRS of shoes for sneakers of 4:3 (that is, he or she is always willing to give
up 3 pairs of sneakers to get 4 pairs of shoes). Then, if sneakers and shoes are equally costly, he or she will:
a.
buy only sneakers.
b.
buy only shoes.
c.
spend his or her income equally on sneakers and shoes.
d.
wear sneakers only 3/4 of the time.
1
9. If an individual’s utility function is given by and I = 100, px = 1, py = 4, his or her preferred
consumption bundle will be:
a.
(20, 20).
b.
(50, 12.5).
c.
(40, 15).
d.
(30, 15).
b
1
10. If utility is given by and px = 2, py = 3, I = 50, this person will choose:
a.
(10, 10).
b.
(15, 6.67).
c.
(25, 0).
d.
(0, 50/3).
1
11. If an individual’s utility function for coffee (x) and cream (y) is given by , the demand function
for coffee is given by:
a.
.
b.
.
c.
.
d.
.
1
12. Suppose utility is given by and px = 1, I = 10. If y must be purchased in whole units, what is the
maximum price this person would pay for that good?
a.
1
b.
5
c.
10
d.
20
b
1
13. An individual has a utility function for tennis rackets (x) and tennis balls (y) of the form . His or
her expenditure function is given by:
a.
.
b.
.
c.
.
d.
.
1
Problems 14 and 15 assume that a person has a quasi-linear utility function of the form .
14. If , what is the utility maximizing commodity bundle?
a.
(8,1)
b.
(2,4)
c.
(1,4.5)
d.
(5,2.5)
1
15. If this person starts from a utility maximizing position, an increase in income will cause:
a.
more of both goods to be bought.
b.
more of only good y to be bought.
c.
more of only good x to be bought.
d.
more x and less y to be bought.
1